Mining and Economic Development

Ms. Lumba is an economic policy analyst for Action for Economic Reforms. This article was published in the Opinion Section, Yellow Pad Column of BusinessWorld, December 12, 2005 edition, page S1/5.

The Arroyo government, saddled with a very serious fiscal problem, has “set its sights on gold” by actively promoting the now-lackluster mining industry to foreign investors. And why not? The government estimates total viable mineral resources at $840 billion or 10 times the country’s annual GDP and 15 times its total foreign debt. The 2004–2010 Medium Term Development Plan (MTDP) claims that revitalization of the mining industry will be able to generate between four and six billion dollars in investments, five to seven billion dollars in annual foreign exchange and at least 240,000 jobs over the six-year period.

Given such prospects, it is no wonder why former DENR Secretary Michael Defensor, calls our vast mineral resources a “gift from God” and sees mining as the key that will unlock the vast potential of wealth, which will lead the country out of poverty and be the springboard towards economic development. Well, maybe?

The traditional view, which posits a positive relationship between natural resources and economic development, was contradicted by two well-known economists Jeffrey Sachs and Andrew Warner. Several of their papers provided empirical evidence of what they call a resource curse. Their 1997 paper entitled, “Natural Resource Abundance and Economic Growth,” shows that the higher a nation’s natural-resource exports as a percentage share of GDP, the lower its growth rate, even after controlling for other factors important for growth, such as initial per capita GDP, international trade policy, government efficiency, and investment rates. They also note that abundant natural resources lead to inefficient bureaucracies and poor institutional quality, resulting in slower growth rates.

Notwithstanding the resource curse expounded by Sachs and Warner, let us concede for the sake of argument that mining and mineral processing may have the potential to be important sources of income and driving forces behind broader economic development. But this potential is not always realized. Whether or not the presence of vast mineral resources Mother Nature has gifted the Philippines will turn out to be a curse or a blessing largely depends on the quality of institutions we have. This is the argument put forward by Halvor Mehlum, Karl Moene and Ragnar Torvik in their 2002 study entitled “Institutions and the Resource Curse.”

The question as to whether an abundance of natural resources proves to be harmful to economic development is determined by the type of institutions that reign in the country. For instance, resource-dependent countries such as Botswana and Norway experienced high growth rates because of “producer-friendly institutions” or good institutions characterized by an effective rule of law, well-functioning bureaucracy and honest government. Both countries were also ranked to have the least corrupt government agencies. On the other hand, Venezuela, Nigeria and Mexico (countries which also experienced natural resource booms) exhibited slower growth because of “grabber-friendly institutions” or weak institutions characterized by weak rule of law, inefficient bureaucracy and corrupt government.

On the local front, several environmental disasters such as the Marcopper incident and Mt. Diwalwal tragedy reveal the weakness and inefficiency of Philippine government institutions to promote and implementing sustainable development as enshrined in the 1995 Mining Act.

Moreover, that the government is perceived to operate as a patron and dispenser of favors. Transparency International’s Corruption Perception Index (CPI) ranks the Philippines a poor 117th among 159 countries surveyed in 2005. In fact, corruption has worsened in the Philippines, says Transparency International. In 2004, the Philippines ranked 102nd in a field of 146 countries. A high CPI ranking suggests least corruption, and a low ranking indicates high and worse corruption.

The presence of huge economic rents from extracting minerals will only perpetuate rent-seeking behavior and worsen corruption. Given this, it is an inopportune, inappropriate move to encourage more investments into the mining industry without first establishing strong and good institutions.

Reform the institutions first. Bad institutions lead to greater costs than benefits for the local communities and the country as a whole. Weak institutions plus resource abundance will not lead the country out of poverty but instead result in slower growth, environmental degradation and social displacement.